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Why does times-interest-earned use operating income, but the return on equity uses net income instead of...

Why does times-interest-earned use operating income, but the return on equity uses net income instead of operating income?

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The times interest earned (TIE) ratio is a measure of a company's ability to meet its debt obligations based on its current income. The formula for a company's TIE number is earnings before interest and taxes (EBIT) divided by the total interest payable on bonds and other debt.The result is a number that shows how many times a company could cover its interest charges with its pretax earnings.A company's capitalization is the amount of money it has raised by issuing stock or debt, and those choices impact its TIE ratio. Businesses consider the cost of capital for stock and debt and use that cost to make decisions.

So while calculating the ability of a firm to repay the interest from the profit earned from the business is to be calculated from the real operating profit without deducting interest.

Return on equity (ROE) is a measure of financial performance calculated by dividing net income by shareholders' equity. Because shareholders' equity is equal to a company’s assets minus its debt, ROE is considered the return on net assets. ROE is considered a measure of how effectively management is using a company’s assets to create profits.

ROE uses Net income for calculation because it required to calculated the distributable profits to the shareholders after deducting all the expenses attributable.

jeff jeffy answered 2 years ago
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